Investment in transport plays an important role in a country’s economic development. This column assesses Indian industries that are moving out of the congested big cities in search of cheaper land and buildings, facilitated by major highways. The Golden Quadrilateral highway project -- a huge, country-wide highway building project connecting four major Indian cities -- significantly influences the success of industries’ exodus from the big cities. It is clear that although highway investments are expensive, the costs of not investing may be too high.

Transport investments within cities and across cities are essential for economic growth, job creation, and poverty reduction. Beyond simply facilitating cheaper and more efficient movements of goods, people, and ideas within cities, transport affects the distribution of economic activity across cities. Many researchers have shown that transport investment plays an important role in spatial development and urbanisation. Henderson et al. (2001) find that industrial decentralisation in South Korea is attributable to massive transport and communications infrastructure investments. Baum-Snow et al. (2012) show that transport infrastructure aided the decentralisation of industrial production and population in Chinese cities. Several other studies find positive economic effects in ‘non-nodal’ locations due to transportation infrastructure in China (e.g. Banerjee et al. 2012, Roberts et al. 2012). Desmet et al. (2012) have argued that manufacturing in India is slowly moving away from high-density districts to districts that are less congested, allowing industrial activity to spread more equally across space.

In a recent paper (Ghani et al, 2013) we examine the impact of the Golden Quadrilateral project, a large-scale highway construction and improvement project in India (Datta 2011). The Golden Quadrilateral project sought to improve the connection between four major ‘nodal’ cities in India: Delhi, Mumbai, Chennai and Kolkata. It is the fifth-longest highway in the world. Road transport is the principal mode of movement of goods and people in India, accounting for 65% of freight movement and 80% of passenger traffic. While national highways constitute about 1.7% of the road network, they carry more than 40% of the total traffic volume. The massive project began in 2001, was two-thirds complete by 2005, and was more or less finished by 2007. Figure 1 provides a map of the Golden Quadrilateral network. It also shows another highway, the North-South East-West (NS-EW) network, which was scheduled to be upgraded with the Golden Quadrilateral project but had a delayed implementation.

Figure 1.

We examine how proximity to Golden Quadrilateral in non-nodal districts affected the organisation of manufacturing activity using establishment counts, employment, and output levels, especially among new firms establishing plants for the first time, thereby making location choice decisions before or after the upgrades. We also examine industry-level sorting and the extent to which intermediate-sized cities in India are becoming more attractive for manufacturing plants. Our core sample contains plant-level data from 312 districts. This accounts for over 90% of plants, employment and output in the manufacturing sector.

Our key focus is on non-nodal districts that are very close to the Golden Quadrilateral network compared to those that are farther away. We specifically compare non-nodal districts 0-10km from the GQ network to districts 10-50km away (and in some specifications with additional concentric rings to 200km away). Additional sources of variation come from the sequence in which districts were upgraded, differences in industry traits within the manufacturing sector, and differences in the traits of non-nodal districts 0-10 km from the Golden Quadrilateral network.

Positive impact

We find positive effects of the Golden Quadrilateral upgrades on the organised manufacturing sector. Panel estimations find substantial growth in entry rates in non-nodal districts within 10km of the Golden Quadrilateral network after the Golden Quadrilateral upgrades (Figure 2). These patterns are absent in districts 10-50km away, and the data suggest that there might have even been declines in entry rates in districts farther away (perhaps indicative of a more substantial shift of activity towards the Golden Quadrilateral network due to the improved connectivity). Heightened entry rates are evident in districts where the Golden Quadrilateral project upgraded existing highways and where the Golden Quadrilateral project constructed new highways where none existed before.

Figure 2.

Beyond entry rates, we find positive but statistically insignificant impacts for the total level of manufacturing activity across all districts within 10km of the Golden Quadrilateral network. There is greater heterogeneity on this dimension, however, with the construction of new highways being associated with aggregate activity gains. In terms of performance, panel estimations show a substantial increase in labour productivity and total factor productivity among manufacturing plants in non-nodal districts within 10km of the Golden Quadrilateral network that is not present in districts that are 10-50km removed or farther.

Do we find similar results in the NS-EW highway, India’s second major highway network? The NS-EW highway was scheduled for a partial upgrade at the same time as the Golden Quadrilateral network, but this upgrade was delayed. The upgrade has since been undertaken. Comparisons of non-nodal districts on Golden Quadrilateral to non-nodal districts on the NS-EW highway are attractive given the comparable initial condition of being located on a major transportation network. We do not find similar effects along the NS-EW highway system that we observe along the Golden Quadrilateral highway for either our entry or performance results.

Deconcentration of industries

We find that the heightened entry rates following the Golden Quadrilateral upgrades in non-nodal districts within 10km of the Golden Quadrilateral network were strongest in industries that are very land- and building-intensive. Interestingly, we find the opposite pattern for nodal districts, where the shift is towards industries that are less intensive in land and buildings. This general urban-rural or core-periphery pattern is evident in many countries, and is associated with the efficient sorting of industry placement. Moreover, this feature has particular importance in India due to government control over land and building rights, leading some observers to state that India has transitioned from a ‘license Raj’ to a ‘rents Raj’. Given India’s distorted land markets, the heightened connectivity brought about by the GQ upgrades may be particularly important for the efficient sorting of industry across spatial locations.

These patterns suggest that the Golden Quadrilateral upgrades may have helped with the efficient sorting of industries across locations. In an earlier paper (2012), we also found that infrastructure aids efficient sorting of industries and plants within districts, and these patterns show a greater efficiency across districts. Many studies have warned about the misallocation in the Indian economy (e.g. Hsieh and Klenow 2009), and these results suggest that better connectivity across cities and districts may be able to reduce some of these distortions. These results also suggest that highways may improve upon land-market distortions caused by the ‘rent Raj’.

Highways and spatial development

Can investment in infrastructure such as highways play a role in facilitating the shift of manufacturing activity from dense large cities to intermediate-sized cities? We group districts into three ‘bins’ or groups, based on their population density. Golden Quadrilateral upgrades have increased numbers of new entries the most in high- and medium-density districts that lie 0-10km from the Golden Quadrilateral network. For instance, moderate-density districts – like Surat in Gujarat or Srikakulam in Andhra Pradesh that lie on the Golden Quadrilateral highway – registered an increase in new output and new establishment counts of more than 100% after Golden Quadrilateral upgrades. On the other hand, the Golden Quadrilateral upgrades are not linked to heightened entry or performance in low-density areas. These results suggest that the improved connectivity enables manufacturing establishments to efficiently locate in intermediate cities, but that localisation economies prevalent for the sector continue to preclude entry in low-density places.

Disclaimer: The views expressed here are those of the authors and do not necessarily represent those of the institutions with which they are affiliated.